The term FDI has been used very loosely and hence before getting to the subject matter of whether it should be allowed in Real Estate , we need to understand FDI and the rules that govern it.
The gates of Real Estate business were thrown open to the Foreign Direct Investment in 2001.Initially, it reached up to 30% of Foreign Direct Investment through Approval route. In 2005 FDI was allowed under the Automatic Route. In other words Persons Resident Outside India (‘Foreign Investors’) were allowed to invest to an extent of 100% into an Indian entity involved in real estate development in the country without seeking prior permission of the Government of India or the Reserve Bank of India or the Foreign Investment Promotion Board or the Ministry of Finance, as may be required, subject to the conditions prescribed.
However, it is pertinent to note that the conditions and requisites for FDI are not applicable to Non Resident Indians (‘NRI’s’) investing in real estate or Real Estate Development Sector. NRI’s may invest in housing and real estate development projects across the country, without any conditions, for up to an extent of 100%.
Under the FDI Policy Foreign Direct Investment is only permitted in development of Townships, Construction of Residential/ Commercial Premises, Roads or Bridges, Built-up infrastructure and construction-development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions). Subsequently Hotels, Tourism, Hospitals and SEZ have been taken out of the policy and are governed by separate conditions that need to be satisfied.
The conditions to be satisfied for FDI are as follows:
- In case of development of serviced housing plots, a minimum land area of 10 hectares (25 acres) of land needs to be developed.
- In case of construction-development projects, a minimum built-up area of 50,000 sq.mts (538,200 sq.ft.)
- In case of a combination project, any one of the above two conditions would suffice.
- Minimum investment of US$10 million (Rs.50 crore) for wholly owned subsidiaries and US$ 5 million (Rs.25 crore) for joint ventures with Indian partners.
- The funds would have to be brought in within six months of commencement of business of the Company.
- Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with prior approval of the Government through the Foreign Investments Promotion Board (FIPB).
- At least 50% of the project must be developed within a period of five years from the date of obtaining all statutory clearances.
- The investor/investee company would not be permitted to sell undeveloped plots. It will be necessary that the investor provides the required infrastructure and obtains the completion certificate from the concerned local body/service agency before he would be allowed to dispose of serviced housing plots.
- The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities, as laid down in the applicable building control regulations, bye-laws, rules, and other regulations of the State Government/ Municipal/ Local Body concerned.
- It will be the responsibility of the investor/investee company to obtain all necessary approvals.
Now coming to the point ….
As is evident from the definition of what covers real estate where FDI is allowed the objective of the Government is to channelize foreign investment into creating housing and related infrastructure in the country. India is presently growing at 7% p.a. today which is a result of a Global slowdown and the maximum growth rate it has ever achieved is 8.75%. This growth is restricted by lack of infrastructure in the country. By infrastructure we mean Road, Railways, Transport, Sea Ports, Air Ports, Logistic Parks, Connectivity, Traffic management, decongestion of cities etc. If we need to grow beyond 9.5% p.a. India needs US$ 1.3 Trillion (Rs.65 lakh crore) over the next 20 years to develop its infrastructure. India’s present GDP is US$ 1.85 Trillion (Rs.92 lakh crore). Hence there is a crying need for FDI in the holistic sense of the development of the Indian Economy.
In the micro scenario, if we restrict our vision of Real Estate to just Housing and Commercial complexes, the FDI story begins to sore. Although huge amount of FDI has come into the country since liberalization of policy in 2005, it has been misdirected towards building high end residential units , townships and commercial spaces concentrated in metros of Mumbai, Delhi and Bangalore creating a situation of over supply and consequent crash of the housing market in 2008 and an imminent crash expected in 2012.
At the same time there is a crying need for more than 2.5 crore housing units in the LIG and MIG segment across the country and a big opportunity for anyone with the right vision. This is where the FDI needs to be directed whereby Tier II and Tier III cities will see growth and development of infrastructure. This will lead to balanced growth of the economy across the country instead of just being visible in a few metro cities.
The abundance of FDI also lead to a sense of arrogance among developers who no longer depended on sales to raise funds for project development. This has lead to artificial pricing which has nothing to do with affordability and demand and thus made most of the housing in metro cities unaffordable. This has lead to a severe slow down in demand, however the industry players prefer to live in denial displaying a typical ostrich approach to the problem.
FDI is a double edged sword which needs to be handled carefully or else it will end up destroying us if not directed properly to sectors of the economy where it can be used better. FDI should also lead to balanced development across the country and should be used to develop housing, commercial and other complementing infrastructure as well, so that the overall growth targets of the economy are achieved whereby we will be living in a ever growing economy where growth is ‘inclusive’ (all sections of society need to benefit, not just city dwellers).